Continuity Of FX Policy, Hot Air Notwithstanding

A
burst of commentary on the CBN’s fx regime on the newswires last week warrants
a re-examination of the underlying issues. While in reality little, if
anything, has changed, it is worthwhile restating our house view. There has
been a convergence of rates over many months such that we can safely talk of
the subsidized rate (of N307) and other, non-subsidized rates. We do not see
unification (ie scrapping of the former) in a hurry. The re-election of
Muhammadu Buhari and his appointment of Godwin Emefiele for a second term as
governor reinforce our view.

The preferential rate suits the CBN, notably for imports of petroleum
products.

The importers’ and exporters’ window (NAFEX) has its critics on the
grounds of transparency and the extent to which it is market-determined. Such
flaws have not deterred foreign portfolio investors (FPIs), who are comfortable
with its “willing buyer, willing seller” basis provided that they can make
their exit.

Floating rates are rare among EMs that are major oil exporters. They are
a risk that EMs generally avoid.

The game changes, of course, in the event of a dramatic and sustained
fall in the crude price, which would alarm FPIs, and bring pressure on reserves
and the exchange rate. This is not our current expectation.

Average
exchange rates (NGN per USD)

Sources: CBN; FBNQuest
Capital Research

There is one reason to question the operation of several exchange rates,
and it is not ideological. This is the difficulty of tracking changes and
assessing their significance. For example the local media reported last week
that the customs service had started to levy import duty at a rate of N326 per
dollar rather than the CBN’s/official N307. The obvious explanation is surely
fiscal since the customs (and therefore the authorities) would welcome the
additional N20 per dollar on eligible imports.

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